Fears are growing of a major escalation in violence in Crimea after two people died in clashes between Ukrainian and pro-Russian forces.

Ukrainian prime minister Arseniy Yatsenyuk said the incident in Simferopol showed Moscow was moving the confrontation from the "political to the military stage".

But details were sketchy, with Kiev claiming one of its soldiers had been shot in the neck, and Russian supporters saying a "self defence" fighter had died.

Giving evidence to MPs this evening, Foreign Secretary William Hague said: "Whenever we hear about such things it underlines the grave dangers in this tense situation, where a provocation or flashpoint could easily occur."

The episode came after a dramatic day when President Vladimir Putin defied Western anger by announcing new laws allowing Crimea to join the Russian Federation. David Cameron accused Moscow of a "flagrant breach of international law" in trying to annex the region on the basis "of a sham referendum held at the barrel of a Russian gun".

"President Putin should be in no doubt that Russia will face more serious consequences and I will push European leaders to agree further EU measures when we meet on Thursday," the Prime Minister said.

Downing Street said work was already under way on further EU sanctions that could be implemented against Russia, and would be discussed in detail by the 28 nations at the European Council in Brussels.

Britain is backing a call from US president Barack Obama for leaders of the G7 nations - the US, UK, Germany, France, Italy, Japan and Canada - and the EU to meet to discuss the Ukraine crisis on the fringes of a nuclear security summit in the Netherlands next Monday.

During an impassioned speech at the Kremlin, Mr Putin accused the West of behaving "irresponsibly" in backing an "extremist" uprising to oust pro-Moscow president Viktor Yanukovych in Kiev.

"In the hearts and minds of people, Crimea has always been, and remains an inseparable part of Russia," he said.

The result of Sunday's referendum, which produced a 96% majority in favour of leaving Ukraine, was "more than convincing", he said.

"The people of Crimea clearly and convincingly expressed their will - they want to be with Russia," said Mr Putin.

Britain has suspended military cooperation and arms exports to Russia amid fears there is a "grave danger" of military escalation in Ukraine.

The EU has set up a three-phase approach under which sanctions would be ratcheted up if Russia failed to de-escalate the situation.

The second phase was activated on Monday with the announcement of travel restrictions and asset freezes on 21 key individuals in the Russian and Crimean regimes.

Mr Cameron's spokesman told reporters that the Prime Minister believes that it is now time to move to the third stage, which includes wider economic and trade sanctions against Russia. The US has also imposed financial restrictions on senior figures, and warned of more to come.